The Perfect Storm in Power

The Daily Reckoning PRESENTS: Recently, Chris Mayer reported on the pressing issues facing power grids all over the world. Today, he points out the investment opportunities that relate to this power crunch. Read on…

THE PERFECT STORM IN POWER

The Perfect Storm dramatized the events surrounding a powerful nor’easter that raged over the Atlantic Ocean in 1991. The storm was the product of some fluky weather patterns, all of which converged to create a monster of a storm. The movie focused on the ill-fated travails of a small fishing boat, the Andrea Gail of Gloucester, Mass., which was lost at sea. It was a good movie, I thought. You could almost smell the fish and salty sea air and feel its cold dampness on your skin.

Probably in part due to the success of that film, we commonly use the phrase “perfect storm” these days to describe a combination of events which, taken individually, would have been far less powerful.

The idea of a “perfect storm” comes to mind when I think about the world’s need for new electrical power grids.

I recently wrote to you, dear reader, about the pressing issues facing the North American power grid. Blackouts already occur about once every four months on average in the U.S. And that includes only those blackouts that affect at least half a million homes.

Of course, it’s more than just a problem for those of us in North America. Power shortages exist in markets all over the world. That’s one of the things that make this so fascinating – and which bring to mind the idea of a perfect storm.

If it were just the U.S. and Canada, perhaps that would not be such a powerful investment theme. But it’s the combination with other parts of the world that give it an out-sized feel. Just adding China alone to the mix makes quite a difference.

I recently finished a book titled From Wall Street to the Great Wall, which further brings home this point. “Electrical power shortages are chronic today” in China, the authors note. “Blackouts are not uncommon, and manufacturing is affected directly.”

Later, the authors quote a story from the Guardian: “China is on the biggest power plant building spree the world has ever seen.” Hydroelectric dams, coal-fired generators and nuclear facilities sprout like weeds throughout China. “The equivalent of Britain’s entire electrical output is being added to the capacity of the country’s national grid every two years.”

Really, the power story is only part of a bigger thread. The more you look into this sort of thing, the more you find that it is about more than just power (or just water, for that matter). It’s a combination of all of these things. What we’re talking about is infrastructure. Admittedly, infrastructure is an ugly four-syllable word that leaves a lot of room for interpretation. As with pornography, you know it when you see it.

India, often paired up with China in these kinds of stories, has its own infrastructure problems. Wandering cows in the middle of pockmarked roads is only one of them. So notes The Wall Street Journal: “The nation’s capital is bedeviled by the same sort of cramped airports, rough roads and frequent power outages that recall the darker days (often literally) of China’s own economic opening.”

These are the headline cases. At the margins, though, you see similar trends in smaller emerging markets. All of it is more fuel for the perfect storm. Take a look at Africa.

There is an old joke told in many parts of Africa. It goes like this: “What did we do before we used candles?” Answer: “We had electricity.” War, poor management and under-investment have done their usual thing. And while the infrastructure of Africa crumbles, the population has tripled since the 1960s.

Investment dollars, though, are trickling back to Africa. There is the promise, for example, of the great Congo River. Harnessed, it could generate over 40,000 megawatts of electricity. That’s more than all of what South Africa produces today. Given a decent power station and linked to a modern power grid, the Congo River could supply power Africa needs for a long time.

Congo is typical of much of Africa. At Inga, Congo, there are two hydropower stations. The more modern one has eight hydroelectric turbines. However, years of neglect have left only three working. The Dark Continent – a term used originally to describe unexplored Africa – truly earns its name.

China has taken a big interest in Africa in its quest for natural resources – in particular, oil. The Chinese have already committed $10 billion in infrastructure projects. They’ve already built roads, railways, ports and more in Africa. China’s approach to Africa is a pragmatic one.

When the dollars don’t come from China, the World Bank or other places abroad, they come from within. For example, in South Africa, investment in infrastructure is a top priority. The government plans to spend $49 billion on roads, ports and power plants over the next three years.

This is an admittedly brief look at Africa. I could also tell you similar stories about the Middle East. Or I could talk about Southeast Asia (in particular, Vietnam and the Philippines). All of them plan to raise, or have raised, billions and billions of dollars for building the basics – things like power grids. It’s all part of the perfect storm I see shaping up in the world’s electrical power systems.

Regards,

Chris Mayer
for The Daily Reckoning
January 24, 2007

Editor’s Note: Chris Mayer is a veteran of the banking industry, specifically in the area of corporate lending. A financial writer since 1998, Mr. Mayer’s essays have appeared in a wide variety of publications, from the Mises.org Daily Article series to here in The Daily Reckoning. He is the editor of Mayer’s Special Situations and Capital and Crisis – formerly the Fleet Street Letter.

Goldman Sachs paid out $16.5 billion in salaries and bonuses last year.

A group of 11 top executives carved up $150 million, while all employees made an average of $622, 000.

Slurp!

Was ever there a better time to work on Wall Street…or in London’s equivalent, the City?

Probably not.

Now, the do-gooders are howling about it. Even Congressional blowhards are beginning to blow. They see a headline or two coming out of it…maybe a lift in their ratings.

On the one hand, voters like to press their noses to the glass and look in on the rich and famous – it gives them hope for the future. And they know that it doesn’t take any special brains to become rich; they’ve seen Kevin Federline and Ted Kennedy on TV. They imagine there must be some kind of luck behind it. So they buy lottery tickets and stocks…and hope some of the moolah flies their way.

On the other hand, they sense that something is not quite right. “How come these fellows make so much money?” they wonder. “Where does it come from?”

They feel a little left behind.

“Retirees Up Against Debt”, says the headline on today’s USA Today newspaper.

While the rich get richer, the poor seem to get poorer. And the old seem to be getting poorer faster than most.

“From 1992 to 2004, the percentage of households 55 and older with overall debt grew faster than the rate of the overall population,” says USA Today. “Those 75 and older packed it on most quickly: The average load for those households with debt shot up 160% to an average of $20,234 during this time, according to research by the Employee Benefit Research Institute, a non-partisan group that studies economic security.

“Among households 65 and older, the average amount of credit card debt more than doubled from 1992 to 2004, to $4,907, according to Demos, a New York think tank. Seniors’ debt levels are catching up to those of younger people.

“Seniors in and approaching retirement – such as the oldest baby boomers – are carrying ‘debt loads that their parents would not have considered,’ says Sally Hurme of AARP, the advocacy group for people 50 and older. ‘This does not bode well for financial health.’ A record number of old people are going bust, continues the report, with people 65-and up the fastest growing group in the bankruptcy courts.”

Their eyesight may not be what it was, but they can still squint at the papers. And what they see is a strange sight: all over the world, people are getting rich.

More news:

————–

Chuck Butler, reporting from the EverBank world currency trading desk in St. Louis…

“The pound has been outperforming the euro recently, so even though the euro is the Big Dog on the porch, the pound has flexed its muscles recently, and the euro has let the pound rule the porch for now.”

For the rest of this story, and for more insights into today’s currency markets, see The Daily Pfennig

————–

And more thoughts:

*** Scientists have recently discovered a large number of “intersex” fish in the Potomac River – fish that have both male and female organs. The phenomenon was previously documented in smallmouth and largemouth bass in the Potomac River and some of its tributaries in Maryland, Pennsylvania, Virginia and West Virginia, and is now being found in redbreast sunfish.

The incidence of intersex in male smallmouth bass has been as high as 100 percent in some sample areas.

We’ve always said that there must be something in the water in Washington…but we never realized how close to the truth we actually were…

*** “It is in our vital interest to diversify America’s energy supply – and the way forward is through technology,” George W. Bush told the nation last night. “We must continue changing the way America generates electric power – by even greater use of clean coal technology… solar and wind energy… and clean, safe nuclear power. We need to press on with battery research for plug-in and hybrid vehicles, and expand the use of clean diesel vehicles and biodiesel fuel. We must continue investing in new methods of producing ethanol – using everything from wood chips, to grasses, to agricultural wastes.”

The president also wants to reduce gasoline use by 20% over the next decade, increase the renewable and alternative fuels target fivefold, increase domestic oil production and double the size of the Strategic

Petroleum Reserve.

Justice Litle, on the DR energy beat, comments: “This all sounds well and good. The trouble is professional speeches usually do.

“The real problem, in your humble editor’s opinion, is that the establishment – and much of the country – is still living in a fantasy world, where all problems can be solved via superficial commitments to ‘get ‘er done’ and the enthusiastic nodding of heads.

“Real pain? Genuinely uncomfortable change? No, we don’t need any of that. We’re entitled to the status quo. Can’t we just take some half-measure and be done with it? There’s got to be a painless way…we demand that superficial solutions and political lip service be enough. (Plus, free unicorn rides for all!)

“In reality, we will need all the measures the president highlighted – and then some – to make it through the serious energy challenges waiting for us ahead. And yet there are still millions of what-me-worry types happy to put their feet up and whistle Dixie, just because oil has backtracked a bit from last year’s high. It is their comfort, and the status quo standard of living, that is paramount. Not meaningful follow-through on measures that threaten discomfort.

“What the Pollyanna, what-me-worry types refuse to acknowledge is this:

Premature complacency is the energy equivalent of a cake and ice cream diet. If a morbidly obese person celebrates with half a quart of Breyers every time he loses two pounds, how much lasting good will come out of it? If we are so confident that everything will simply ‘work out,’ where will the sense of urgency come from that forces us to take matters seriously?

“History does not put much store by the painless solution. Just as few diets are taken seriously until the heart attack or stroke or onset of diabetes looms, concerns of long-term urgency are generally not taken seriously until the cost becomes starkly clear.”

*** “U.S. President George W. Bush’s State of the Union message,” observes our friends at Stratfor, “was framed by the release Monday of a CBS public opinion poll that shows Bush’s approval ratings falling to only 28 percent. Those are the lowest ratings he has ever received, and take him to levels seen late in Watergate, in the weeks leading to Nixon’s resignation.”

“Even if we discount the CBS poll [as being entirely biased], Bush is now edging from the area where we can call him a crippled president – if not a failed one – to an area where he could genuinely lose the ability to govern. If his numbers plunge into the 20s, a substantial number of Republican senators and congress members might well decide that it is time to cut their own political losses and break with the president openly. That is what happened to Nixon. Leaving out the question of resignation or impeachment – neither of which is possible under even worst-case scenarios – Bush could face a revolt by enough Republicans in Congress that funding cuts could be imposed even in the face of a presidential veto. Presidents who have two-thirds of the public thinking poorly of them and only a quarter liking them might hold the office, but they do not run the country – at least not very effectively.

“We are now very near to the point where Bush’s ability to govern, even in his role as commander-in-chief, is in jeopardy. We would judge that he is not quite there yet; but if other polls were to fall and stay in the 20s, the Republicans in Congress would split wide open. At this point, Bush is one piece of bad news away from paralysis. He could get lucky, but luck is one thing this president has not been able to count on.”

*** Our friend Chip Wood reminds us of another period in history when the public confidence was shaken in government:

“On January 23, 1968, [39 years ago] Americans were stunned to learn that a U.S. Navy vessel, the USS Pueblo, had been captured by North Korea. One crewman was killed in the assault, the other 82 were shackled, blindfolded, and taken to prison. President Lyndon Johnson forbade any attempt to rescue our seamen or to retaliate against their captors. The U.S. stood by, seemingly helpless, as the crew was tortured and starved for 11 months before being released….”

[Ed note. Chip, by the way, has served with great distinction as the MC of our annual Vancouver Conference. Last year’s event, Investing In The Age of Empire, was a huge success. Attendance at this year’s is already swelling. Our theme? This year we’ll focus on the Rim of Fire: Crisis and Opportunity in the New Asian Century. To register, and lock-in an early, early, early bird discount of nearly 60%… please call Barb Perriello at 800-926-6575]

*** We read the paper and notice that Iraq seems to have gotten much more brutal and dangerous since it has enjoyed the benefits of democracy. On a single day last week, one hundred people died in Iraq. Thirty thousand died last year, said the press reports. The numbers of dead and maimed keep rising.

So do the costs.

Nicholas Kristof, of the New York Times, notices that our president is in roughly the same position as Alcibiades in ancient Athens. The man had led the country to war in Sicily…after others had warned him that it was a dangerous waste of time and money. According to Thucydides’ account, Nicias said of the campaign, “[it is] a war that does not concern us.” But Alcibiades had insisted, claiming that the Athenians would be welcomed as liberators…and that the ‘rabble’ would be easily defeated.

As it turned out, the campaign went badly. And so the pro-war groups had to go back to the Athenian people, asking for more money and more troops. What they needed, they said, was a ‘surge’ that would finally overcome resistance. At that stage, they couldn’t honorably face the prospect of defeat and withdrawal. So, against much internal opposition, the new troops were raised – 5,000 of them – and sent, on 70 ships, to support the war effort in Sicily.

The result was a catastrophic defeat. Not only was the Sicilian adventure a total failure, it so weakened the Athenian state, that its enemies ganged up on it and the country was soon conquered by the Spartans. Thousands of Athenians were killed. Thousands more were sold into slavery. And Athens became a vassal state, paying tribute to Sparta and its allies.

About Chris Mayer:

Chris Mayer is a financial analyst with Bonner & Partners. He has been quoted many times by MarketWatch and has been a guest on Forbes on Fox, Fox Business and CNN Radio, and has made multiple CNBC and radio appearances. He’s also contributed to The Washington Post. Chris travels the world looking for great ideas and insights for his readers.